Employees vs. Independent Contractor

We are often asked by both potential and existing customers if our insurance program provides liability coverage for independent contractors and whether those same independent contractors should be added to the general liability policy as an additional named insured.

It is important to establish if the parties are truly independent contractors or if they are instead employees. To answer that question, the Internal Revenue Service has prepared a 20 point test that is used to make the distinction between an independent contractor and an employee.

The link below provides an overview of the 20 point test:

20 PT IRS Factor Test

If after a review of the IRS guidelines to determine if the individual is an independent contractor or an employee and you have determined that they are an independent contractor, then they would be considered a sub-contractor, hired by your company to perform services on behalf of your company. In the event of an incident where a 3rd party, someone other than the sub-contractor or an employee of your company, were injured or their property was damaged your company could be held liable.

The question often arises – “What do I need to do to protect my business?”

First, you should secure a hold harmless agreement that the sub-contractor signs. This is an agreement that transfers the risk of loss for any act of negligence on their part to their own company.

Secondly, you should make sure that they have adequate insurance in place for the company and that your company is listed as additional insured on their policy. If they do not have insurance coverage, in most cases, they can be added to your policy as an additional named insured for a reasonable fee.

If, after reviewing the 20 point test, you determine they are employees rather than independent contractors, they will be automatically covered under your insurance policy. All employees are covered in a standard General Liability policy under the definition of named insureds.

Additionally, if you determine these individuals are employees and you have been inadvertently treating them as independent contractors, and they are injured on the job, they can file for workers compensation coverage against your company. If you do not have coverage in place, your company can be fined and you may also be fined personally for not having the adequate coverage in place.  In many cases, depending on the State in which you operate, the fine can be up to $1,000 per day.